Wednesday, April 29, 2009

Beyond the First Hundred Days: Securities Regulation

We are rapidly approaching the seventy-fifth anniversary of the creation of Securities and Exchange Commission. Its organic statute, signed into law by Franklin D. Roosevelt on June 6 as the Securities Exchange Act of 1934, had a longer and more difficult birth than the Securities Act of 1933. The 1933 act had passed rapidly into law from the pens of three proteges of the Harvard law professor Felix Frankfurter, thanks to the mediation of a presidential advisor, (Ray Moley); the championing of the politically astute, powerful and populist chairman of the House Interstate Commerce Committee (Sam Rayburn); fumbling by a Senate committee as it attempted to translate the revelations of its investigator, Ferdinand Pecora, into legislation; the absenteeism of the Treasury Department under an infirm nonentity; the incompetent opposition mounted by Sullivan & Cromwell’s John Foster Dulles; the near-protestation of finance capitalism; and the crisis atmosphere of the First Hundred Days. In 1934, in contrast, investment bankers, New York stock exchanges, and publicly traded corporations had regained their footing; their lawyers had assembled into a more potent phalanx; Treasury officials had demanded and won a say in the process; the Federal Reserve more aggressively defended its prerogatives; and the Senate more effectively asserted its authority. At the end of the process, most of the rivals declared victory–in part because they could see their influence in the act, in part because Congress refused to legislate beyond its reach, leaving important but poorly understood matters (such as the control of the over-the-counter market) to the SEC to investigate and regulate.

One phase of the legislative origins of the Securities and Exchange Act is particularly noteworthy today: far from taking the lead, Treasury officials could only react to proposals as they emerged from different parts of the administration. Wall Street had its greatest influence in a committee headed by Secretary of Commerce Daniel Roper. Its influence upon the reconstituted team that had drafted the 1933 act, was indirect and countered by the appointment of one of their number (James Landis, pictured at left) to the FTC, the continued support of Sam Rayburn, better relations with the Senate, and access to the “excess human capital” of the New Deal’s talented young lawyers. These drafters were hardly financial naifs–Thomas Corcoran (pictured at right) had worked in a major New York firm and was said to have won and lost a healthy sum on Wall Street; Benjamin Cohen was said to have won and kept another; Landis was a leading authority on “blue-sky” laws, the state-level precursors of federal securities regulation. In other circumstances, however, they could not have broken through the condescension of better credentialed industry insiders. As it was, they had to endure weeks of heated exchanges behind closed doors with Treasury, Federal Reserve, and Commerce officials, holding their own only because they outworked the opposition. They also were undeterred by Red-baiting, including the famous description of Corcoran and Cohen’s salon in upper Georgetown as “the Little Red House.”

In the end, the Frankfurter-Rayburn contingent of drafters prevailed. “[Presidential advisor] Ray Moley, [Senate committee counsel] Pecora, Sam Rayburn, and [Vice President and former House Speaker John Nance] Garner have been magnificent,” Benjamin Cohen reported to his mentor Frankfurter, dehors the combat in England. “Otherwise we kids have taken the beating alone. . . . That we’re getting the kind of bill we expect in the teeth of the kind of opposition we have to meet . . . is to me a miracle.”

Analogizing across a historical divide like the one separating us from 1934 is perilous and possibly foolhardy. Still, it’s hard not to find in the legislative history of the SEC reason to second Speaker Pelosi’s call for a new Pecora hearing. News reports of the deliberations before the release of the Torture Memos show President Obama acting on his pledge of open-minded consideration of multiple viewpoints, captured in his emulation of Lincoln’s appointment of a “Team of Rivals” to his cabinet. Right now, however, he seems to be leaving financial regulation to a “Team of Bankers."